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Section 300 of the SFO a way to prosecute insider dealings in shares listed overseas?

2018-11-01

Introduction

The Court of Final Appeal (“CFA”) has recently considered the proper construction of section 300 of the Securities and Futures Ordinance (Cap. 571) (“SFO”) in Securities and Futures Commission v Young Bik Fung [2018] HKCFA 45.


Securities Futures Ordinance Cap. 571

The relevant section in this case is section 300 of the SFO (“Section 300”), which provides, among other things, that:

(1)  a person shall not, directly or indirectly, in a transaction involving securities,

(a)       employs any device, scheme or artifice with intent to defraud or deceive; or

(b)       engages in any act, practice or course of business which is fraudulent or deceptive, or would operate as a fraud or deception.”

(2)  A person who contravenes subsection (1) commits an offence.

(3)  In this section, a reference to a transaction includes an offer and an invitation (however expressed).


Facts

The 1st and the 2nd Defendants, who were solicitors, acquired confidential material price sensitive information in respect of the Standard Chartered Bank (“SCB”)’s takeover of Hsinchu International Bank Co Ltd (“Hsinchu Bank”) in Taiwan. Based on the sensitive information, the 1st and 2nd Defendants had acquired the shares in Hsinchu Bank (“Hsinchu shares”) through the 3rd Defendant. Later, SCB made a tender offer for Hsinchu Bank shares and the Defendants accepted the offer and made a profit. The Court of First Instance and the Court of Appeal had both held that 1st to 3rd Defendants had contravened Section 300. Except the 1st Defendant, the Defendants appealed to the CFA.


Issues

The following issues were considered by the CFA:-

1.        how should the word “person .. in a transaction” be construed under section 300;

2.        how should the word “transaction involving securities” be construed in the context of section 300; and

3.        whether the Defendants’ fraudulent acts were practised “in a transaction”.

The Defendants argued that their conduct fell outside the scope of section 300 since:

1.        a person shall not, directly or indirectly, in a transaction involving securities” shall be construed as requiring “a person” to be a party to the “transaction”. The Defendants are not a party to the transaction as they bought the shares through a third party; (emphasis added)

2.        “transactions” should not be widely interpreted and the acts of purchasing and then selling the Hsinchu shares should be regarded as separate transactions; (emphasis added)

3.        transactions” should not be interpreted to include the sale and purchase of Hsinchu shares which happened outside Hong Kong and the Hong Kong Courts could not find jurisdiction here;

4.        “transactions involving securities” should not include the conduct taken place before the sale and purchase of the Hsinchu shares nor the whole deceptive scheme; and

5.        the fraudulent or deceptive act had to be “in a transaction”, meaning that the offenders shall practise the fraud or deception on the counterparty to the relevant transaction. The Defendants did not practise any fraud on shareholders of Hsinchu Bank in Taiwan or the SCB when contracting to purchase or sell the Hsinchu shares.


The findings of the Court of Final Appeal

(1)  How should the word “person … in a transaction” be construed?

It was held that, “a person … in a transaction” needed not to be a counterparty to the transaction. The phrase “in a transaction involving securities” should be most naturally read as “in connection with” a transaction involving securities. Since the fraudulent scheme of the Defendants was employed in connection with acquiring and selling the Hsinchu shares, namely misusing the inside information to speculate in the stock market and thereby obtaining a profit, the Defendants were caught by section 300.

The CFA commented that the Defendants’ interpretation of “a person … in a transaction” was inconsistent with the legislative history of section 300.

(2)  How should the words “transaction involving securities” be construed?

By referring to HKSAR v Yeung Ka Shing Carson (2016) 19 HKCFAR 279, the CFA agreed with the Court of Appeal that, first, the purchase and sale of the Hsinchu shares shall not be artificially spilt into two separate transactions. The acts of buying and selling the Hsinchu shares were so connected that they could be fairly be regarded as forming part of the same transaction. Further, the Defendants’ scheme was to make a profit by both selling and buying the Hsinchu shares instead of merely buying the shares and not selling the shares. Secondly, by the same token, the fraudulent conduct that took place before the sale and purchase of the Hsinchu shares were so connected with the securities transaction that it could be fairly regarded as forming part of the same transaction.

Spigelman NPJ further commented that “involving” was one the broadest words of association in English and should not be confined to a single arrangement such as a contract for sale or purchase in the present case. Thus, “transaction involving securities” should include a series of inter-related acts taken place before the sale and purchase of Hsinchu shares, including the Defendants’ disclosure and misuse of the inside information for the purpose of trading in securities.

Tang PJ also held that, since the definition of listed securities and listed corporation under section 285 and section 291(5) of Division 2 of the SFO does not include the shares listed on overseas Stock Exchange and Hong Kong is an international financial centre, the definition of “securities” in section 300, which is included in Division 4 of the SFO, should be widely interpreted to include shares not listed in a recognized stock exchange, such as the Taiwan Stock Exchange in the present case.

The CFA held that the conduct which constitutes an insider dealing offence under section 291 of the SFO should be prosecuted to the exclusion of section 300 of the SFO. Spigelman NPJ further opined that section 300 shall not be labelled as a “catch all” provision. Tang PJ was of the view that an offence under section 300 of the SFO should not be upheld if one can establish a defence under sections 292 to 294 of the SFO.

(3)  Whether the Defendants’ fraudulent acts occurred “in a transaction”?

Ribeiro PJ and Tang PJ held that, by not disclosing to SCB that they had bought and sold the shares through misusing the inside information, they had practised a fraud on SCB, which was a party to the transaction. Hence, these fraudulent acts could be regarded as being “in a transaction”.


Conclusion

This CFA’s ruling confirms that, first, there is no requirement that the offender shall be a counterparty to the transaction involving securities under section 300; and secondly, section 300 applies to the Defendants’ fraudulent scheme to deal with Hsinchu shares in Taiwan.


Takeaways

This is the first case the Securities and Futures Commission (“SFC”) had prosecuted a person for an insider dealing offence under section 300, instead of sections 270 and 291 of the SFO which are only applicable when the insider dealing occurs in the Hong Kong Stock Market. It is now confirmed by the CFA that, even if the dealings of the securities occur outside Hong Kong, as long as the act of misusing the inside information occurs in Hong Kong, SFC may prosecute such person under section 300 of the SFO. It is also noteworthy that, since the case of Securities and Futures Commission v Tiger Asia Management LCC (2013) 16 HKCFAR 324, SFC now has the power to apply for a number of orders under section 213 of the SFO, including an order requiring payment of damages and an order declaring a contract to be void, in addition to a penalty from the criminal court against an offender for contravention of any provision of the SFO.




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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2018


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